THE BOTTOM LINE
- Family Ties Don’t Erase Commercial Duties: Transactions between a company and a shareholder’s close relatives are scrutinized by tax authorities as if they were with the shareholder directly. Non-arm’s-length benefits can have direct tax consequences for the shareholder.
- Forgone Income Can Be a “Deemed Dividend”: If a company forgoes commercially justifiable income—such as a lease termination fee—to benefit a shareholder or their family, tax authorities can reclassify the waived amount as a taxable distribution (a deemed dividend) to the shareholder.
- Documentation is King: In a dispute, the burden falls on the taxpayer to prove the timing and business rationale behind intra-family transactions. Without clear, dated agreements, courts will rely on the formal documentation available, such as a property transfer deed, to determine when a taxable event occurred.
THE DETAILS
This case from the Netherlands provides a sharp reminder for owner-managed businesses about the tax risks of informal family arrangements. The situation involved three brothers: two were shareholders in a farming company, while the third owned farmland that he leased to their company under a long-term agreement. When the landowner brother sold the land to a third party, the deal required the property to be “free of lease.” Consequently, the company had to give up its valuable long-term leasing rights. However, the company, controlled by the other two brothers, did not charge the landowner brother any fee for terminating the lease early. The Dutch Tax Authority viewed this as a deliberate transfer of value and issued a personal income tax assessment to one of the shareholders.
The central legal question was whether the company’s decision to waive the lease termination fee constituted a deemed dividend (in Dutch, an uitdeling). Under Dutch tax law, a deemed dividend occurs when a company provides a benefit to its shareholder that it would not have provided to an independent third party under normal business conditions. The tax inspector successfully argued that forgoing a significant termination fee was a clear benefit that impoverished the company and enriched the shareholder’s family. This transfer of value, the inspector contended, was made because of the shareholder relationship, not for commercial reasons, and should therefore be taxed as personal income for the shareholder in Box 2 (income from a substantial interest).
The court sided with the tax authority, affirming that an unrelated party would never have given up valuable, long-term lease rights for free. The decision to waive the fee was clearly a result of the family ties. A key point of contention was when this taxable event occurred. The shareholder argued the lease must have been terminated in 2014, prior to the tax year in question. However, the only concrete evidence was the property transfer deed, dated January 2015. The court found the shareholder’s arguments about the practicalities of the timeline unconvincing without any supporting documents, like a dated lease termination agreement. This sealed the decision, placing the taxable distribution in 2015 and underscoring a critical lesson: in the eyes of the law and tax authorities, informal understandings carry little weight compared to documented facts.
SOURCE
Source: Rechtbank Zeeland-West-Brabant
